NBJ tackles the complex topic of finance & investment in the nutrition industry with our next issue, now on its way to the printer. As we digest all of the research and trending that surfaced in the reporting of that issue, expect some discussion in the coming weeks on the blog about such topics as holistic investing, moving upstream through the murky waters of deal flow, and the modern challenges of being a nutrition entrepreneur. Today, though, let’s talk about the equity markets.

I spoke to Scott Van Winkle of Canaccord Genuity and, on a separate call, Andy Wolf of BB&T Capital Markets to gain some visibility into smart money’s opinion of the road ahead for nutrition stocks. Excerpts from those conversations follow below.

NBJ: Let’s look at the major industry categories in nutrition and talk about year-to-date performance. How about natural & organic foods?

Scott Van Winkle: In general, healthy-living stocks have outperformed the market this year. Natural & organic has the best sector performance, up about 12%. These stocks didn’t start to come back until later in the cycle, but now they are beginning to reflect improved growth in the category.

Andy Wolf: Natural & organic is about 80-90% recovered, in terms of underlying growth trends. It’s really come back as a category. You can see it in the industry numbers and in the company numbers. There’s been a little bit of channel play, and you can still see some slack in demand at conventional stores, but that too is starting to show a rebound. The demand never went away for natural & organic, but in the recession, even dedicated users were worried about finances. Now most of them have made the budget allocation and returned to the category.

NBJ: And supplements?

SVW: Supplements are down about 12%, but the 40% move in NBTY improves that number dramatically. Supplements performed well last year with strong industry trends, and those trends persist, but investors lack faith. Strong category growth brings increased competition, and as we anniversary the jump in sales from swine flu, people expect a slow down. Vitamins were up 18% in October/November 2009. That kind of growth was obviously driven by the cold and flu season, in turn driven by swine flu.

AW: Supplements have had a multi-year run as consumers adopt these healthy lifestyle choices. People want to live better and feel better. Supplements also enjoy a countercyclical demand. As unemployment goes up and consumers lose more health-care benefits, more people use supplements as a substitute for doctor visits—which are down, by the way. It’s a prophylactic approach. Demand looks robust to me across all sales channels for supplements.

NBJ: What are you seeing for multi-level marketers (MLM) and ingredient suppliers?

SVW: Ingredients are up about 3% through the end of July. Last year, the farther down the supply chain you were from the consumer, the likelier you were to see your customers deload or reduce inventory. Ingredient suppliers had a tough time in 2009. There weren’t a lot of new product launches, and customers were cleaning out their inventories. There are signs of more aggressive ordering now, so the fundamental businesses are stronger than they were coming out of last year.

As for MLMs, they’re up about 5%. These stocks outperformed early, because their business was stronger on a relative basis. With weak economics, everybody buys less, but there’s more unemployment and more people looking for part-time work. In a weak economic cycle, more new distributors come online, even though their average sales level drops. Net-net, MLMs were less impacted by global economic issues.

NBJ: What about functional foods?

AW: Functional foods have really lagged. Why? Mix. Most functional products are sold through conventional stores, and demand hasn’t picked up as well in the mass market. I don’t see a real recovery for functional foods until the broader economic recovery is more firmly entrenched sometime in 2011.

NBJ: Looking ahead, where do you see the best performance and the biggest challenges?

AW: The big issue for 2011 is converts. For 20 years now, consumers have been moving, in one way or another, from conventional to organic. The demand curve is still there, but all of the core customers have already come back. Whole Foods Market and other retailers are seeing new customers come into the channel, but for that to continue, well, the economy will have something to say about that as well.

SVW: Retailers are in a very good position in general. They are demanding price concessions from suppliers, and suppliers are giving them. Whole Foods Market and Vitamin Shoppe are in good position, thanks to this competitive advantage over suppliers. Over the next six to 12 months, I think the MLM sector is going to perform quite well. Natural foods will perform well. Supplements will tread water due to Wall Street’s impression of decelerating growth.

Related links:

Quick Take on NBTY Acquisition

2010 Healthy Foods Report

2010 Direct-to-Consumer Selling in the Nutrition Industry Report

There is a very clear takeaway from the cover story in September’s Consumer Reports (CR): Modern media thrives on fear. Modern media thrives on any number of heightened human emotional responses, but fear is one of the biggies. Add in a health scare, and you can (presumably) sell lots of magazines.

In a piece titled, “The 12 Most Dangerous Supplements,” CR profiles several adverse outcomes from consumers of supplements who ingested tainted or overhyped products that sent their bodies into dramatic disarray. One man in Signal Mountain, Tenn. took a general health supplement overloaded with selenium and his fingernails fell off. A woman in Bartlesville, Okla. took colloidal silver to fight Lyme disease and her skin turned blue. A man in Janesville, Wis. took Hydroxycut to lose five pounds and developed acute hepatitis. These are tragic outcomes, worthy of spotlight, and certainly worthy of a healthy dose of fearmongering to prevent repeat occurrences.

What seems less worthy is the prominence of this coverage, and the sure-to-become-viral nature of its impact. My father just emailed me a link to the story this morning, and the issue has barely hit the stands. Watch the nightly news this week, and you’ll have to fight back an impulse to clear out your medicine cabinet.

From my perspective, what’s most newsworthy about the news from CR is the immateriality of the supplements in question, a so-called “dirty dozen.” Colloidal silver? Kava? Coltsfoot? These are not mainstream supplement products. This is, yet again, a bright spotlight choosing to shine on the dark alleys and niche markets of the industry.

Here at NBJ, we thrive on research and quantitative results to fundamentally drive our colorful, insightful and qualitative commentary. In fact, CR cites our sizing of the overall supplement market ($26+ billion in 2009) in the first paragraph of the story. Here are a few more stats:

Top 3 Supplements by 2009 Sales Volume
Multivitamins, $4.8 billion
Sports powders & formulas, $2.5 billion
B vitamins, $1.2 billion

Dirty Dozen Supplements by 2009 Sales Volume
Kava, $20 million
Bitter orange, $20 million
Yohimbe, $10 million

The other nine are too small to track independently, so we lump them into an Other Herbs & Botanicals bucket.

To its credit, CR has a serious and important mission to protect consumers from the likes of colloidal silver and other supplements with dangerously inaccurate label claims. I do not mean to disparage CR’s right and duty to report a story like this. What I do want to suggest, for CR and the rest of the modern mainstream media to hear with wide-open ears, is this: The supplement industry is too big and too nuanced now to paint with one coarse brush. There is earnest and important research happening around the 12 least dangerous supplements, whatever those might be, and reporting of that nature might be more useful, though less frightening, to a population of consumers looking to stay healthy in a broken health care system.

Let’s talk more about the $2.5 billion market for sports supplements, which CR rightly highlights as more prone than others to adulteration. And let’s talk more about the supplements CR profiles as popular and “likely” safe. There are some material sales levels at play here, so I’ll close with a few more stats:

CR’s 11 Supplements to Consider by 2009 Sales Volume
Calcium, $1.2 billion
Cranberry, $78 million
Fish oil, $976 million*
Glucosamine sulfate, $803 million**
Probiotics, $527 million***
Psyllium, $89 million
Pygeum, $7 million
SAMe, $123 million
St. John’s wort, $57 million
Vitamin D, $425 million

*NBJ tracks a collective fish/animal oil.
**NBJ tracks glucosamine with chondroitin.
***CR lists lactase and lactobacillus, which NBJ does not track independently.

As always, NBJ welcomes your comments below.

Related NBJ links:

‘09 Sales Growth Sputters in Every Nutrition Category as Economy Takes its Toll

2010 Nutrition Industry Overview Web Seminar

Supplement Research

I spoke with Scott Van Winkle of Canaccord Genuity this week to parse the pending acquisition of NBTY, Inc. by the Carlyle Group, an asset manager based in Washington, DC with more than $90 billion invested in companies and real estate across the globe. NBTY is a leading manufacturer and marketer of nutritional supplements, with 22,000 products sold worldwide under a host of brand names, including Nature’s Bounty and Puritan’s Pride.

The deal has support of NBTY management and is expected to close late this year. Carlyle offered $55 per share, a significant premium over the current stock price, for a total transaction cost approaching $3.8 billion. Or so I thought. “The irony is that it’s really not much of a premium to the stock price from April of this year, when NBTY traded at $51,” says Van Winkle. “It’s only 8% above the three-month high for the stock.”

According to Van Winkle, Carlyle’s valuation of NBTY on an absolute basis is not that expensive at 8.6 times EBITDA. Relative to peer companies, the valuation places a slight 5-10% premium on NBTY compared to market prices for Herbalife, NuSkin and a host of supplement companies. The bottom line, however, is actually how little such a big deal says about the state of the nutrition industry.

“This is a financial deal,” says Van Winkle. “If you look at all the businesses you can buy, and you’re going to use leverage, you need cash flow to service that debt. NBTY generates a ton of cash and has done so very consistently over the years. They’re a market leader, so this is a very easy deal at this valuation to justify financially. That’s the game here. This isn’t a strategic play. It’s a financial investment.”

I did ask Van Winkle about the finance & investment climate across the broader industry, a topic NBJ will explore in detail with our next issue, and he hinted at a general lack of confidence from investors in supplement companies. “We are seeing lower valuations,” says Van Winkle. “Back in spring 2009, supplements started growing 10% in the mass market, where NBTY does business. Any time you have a big acceleration in growth that’s hard to justify, you want to discount that level of growth.”

Related NBJ links:

June/July 2010: Nutrition Business Overview

2010 Nutrition Industry Overview Web Seminar

Is New Product Development Finally Picking Up Steam in the U.S. Nutrition Industry?

Nutrition Business Journal is coming down from its healthcare practitioner high, but I couldn’t let the channel rest without discussing Wise Woman Herbals (WWH) out of Creswell, Oregon. In reporting our issue about MLM & Practitioner Sales in the Nutrition Industry, and then again in our issue about Direct-to-Consumer Sales, we heard repeated and emphatic accolades about the quality of WWH’s handmade products.

So I picked up the phone and talked to Dave Garland, Operations Manager for WWH, about the story behind the company’s quiet success. WWH produces more than 350 supplements, with a focus on organic, wildcrafted and natural ingredients sold primarily to healthcare practitioners. You won’t find WWH in many health food stores.

“We’re trying to represent that whole traditional, handcrafted approach to herbal medicine,” says Garland. “We don’t do huge batches. Everything’s small-crafted. We think of ourselves as a micro-manufacturer, if you will, of small-batch tincture.” A key to this philosophy is preservation of whole-herb constituents, working as an herbalist might have hundreds of years ago. In fact, the company name reaches back to a time of village doctors, when every small community had a ‘wise woman’ treating illness with handmade tinctures and herbs.

“We don’t want to strip the herbs, to heat-treat them to death,” says Garland. “Our philosophy is that the whole plant is good, there are things there that we don’t want to destroy.” This allows WWH to exert a high-level of quality control into its processes, from sourcing locally to manufacturing compounds by hand. “We don’t manipulate much,” says Garland. “It’s a more natural approach, if you can have a more natural approach to natural medicine.”

WWH follows cGMPs rigidly, and has operated from the outset with quality and safety a top priority. Many of the companies NBJ encounters at the leading edge of quality control—like Gaia Herbs and Ascenta Health, whose traceability programs get a closer look in our upcoming issue—are companies verily built on the concept. GMPs aren’t a big deal if you’ve been operating in-line with them for a decade.

WWH was one of the first small companies granted cGMP compliance. Many product ingredients are sourced locally in the Cascades and coastal mountain regions, with some vendor relationships dating back 20 years. This is another key ingredient to the current debate about supplement safety and efficacy rearing its head in the media and on Capitol Hill. Safety and efficacy seem, in part, the result of working with trusted vendors, whether you are a manufacturer sourcing component ingredients or a retailer selling finished products. Trusted vendors are the kind of vendors who accept corporate audit programs, independent third-party testing, and strategic alignment with philosophical goals around wildcrafting and organic certification. Trusted suppliers lead to trusted products, and consumer trust in the supplement industry as a whole.

Quality control is all the more important when you sell directly through the healthcare practitioner channel. Some products that Garland refers to as ‘low-dose’—like an anti-parasital supplement with black walnut—have alkaloids and low levels of toxicity that preclude sales to a general, retail audience. These are short-term, low-dose compounds that require professional supervision, and a sharp focus on safety during manufacture.

Another way to make high-quality products? Keep it simple. “Our premise is traditional, naturopathic,” says Garland. “Basic, simple tinctures. Simple compounds. We don’t believe in standardization. There are constituents in the herb we want to preserve.”

Related NBJ links:

NBJ’s Integrative Medicine Report 2009

April 2010: MLM & Practitioner Sales in the Nutrition Industry

Health Practitioners Value Revenue-Generating Potential of Selling Supplements

The higher regulatory hurdles being constructed in Europe and, to a lesser extent, the United States for dietary supplements and functional food ingredients have many industry participants “wailing and gnashing their teeth”—as Nutrition Business Journal writes in our upcoming 2010 Functional Food and Beverage Issue. But, not everyone believes increased regulatory enforcement and claims scrutiny will spell bad things for the global supplement and functional food and beverage industries. In fact, according to David Atkinson, managing partner and founder of Circadia Ventures LLP, tighter regulation in both Europe and the United States is “supporting rather than inhibiting investor interest” in the functional food and supplement sectors.

Atkinson made this point during Nutrition Capital Network’s February 16 Webinar, “Trends in International Financing for health and Nutrition Companies.” Although he acknowledged that increased regulation is “setting high hurdles” and “increasing the costs to the industry,” Atkinson said he does not believe—as many in the industry do—that these consequences of stepped-up regulatory oversight “will kill the embryonic sector” of the health and wellness market. “We believe the high hurdles will bring much-needed barriers to entry to the industry and will increase and improve consumer confidence,” he added. “Ultimately, it will allow some higher pricing … and add value to the underlying IP and technology of the industry.”

Investors, Atkinson said, are increasingly interested in the health and wellness space because, “despite the increased regulatory environment the industry faces, it is still likely that a functional food ingredient with very clear, proven clinical benefits could be on the market in half the timeframe of a new drug—while the actual capital costs of getting that product to market are likely to be only a fraction of what a drug would cost.”

Atkinson cited the small, publicly listed U.K. company Provexis as an example of a functional ingredient company that is attracting growing investor interest. “Provexis’ current market cap is over £74 million ($116 million)—a year ago it would have been a fraction of that,” Atkinson said. Helping to fuel investor appetite for this small-but-growing ingredient company is the fact that Provexis was the first company to gain an Article 13.5 health claim approval from the European Food Safety Authority (EFSA) for its tomato extract, Fruitflow.

As NBJ discusses in detail in our upcoming 2010 Functional Food and Beverage Issue, EFSA’s positive opinion has made a huge difference to Provexis. “We got our approval on the 17th of December, and we have since received a very high level of interest from global food and beverage players,” said Provexis CEO Stephen Moon. “The change has been instant. It’s almost like we have got through the desert and finally arrived at the oasis. It has raised the profile of the company.” As Moon explained, the benefits have gone far beyond his company’s ability to commercialize Fruitflow, which has been clinically proven to inhibit platelet aggregation and has been licensed to DSM. “The financial and investment community has now seen the potential of Provexis, and it’s enabled us to raise substantial capital, which is going to help us drive forward our total pipeline.” Most recently, in December 2009, Provexis announced it had raised £2.1 million ($3.4 million) via an open offer to its shareholders.

NBJ’s 2010 Functional Food and Beverage Issue publishes later this month. To order a copy or become a subscriber visit the NBJ subscription page.

Related NBJ links:

A Cascade of Global Regulatory Changes Likely for Supplements Over Next 12 Months

Global Supplement & Nutrition Industry Report 2010

M&A and Investment Activity Slows for U.S. Nutrition Industry